The current US economic rate of recovery has significantly lagged the historical trend of US GDP growth. Many have argued that this is due to the fact that the “low hanging fruit” has already been picked. Scott Grannis places the blame on poor economic policy from the Obama administration, which has instituted policies that have made businesses more risk averse and thus more hesitant to invest. Reforms in tax policy could to much to restore business confidence. Yesterday’s excellent consumer confidence number points to the right direction:
October was spent in the shadow of US presidential elections. Stock markets were flat or slightly negative, and we are seeing increased performance disparity between individual sectors. Despite these headwinds of uncertainty, we managed to earn 0.43% for our clients, bringing our year-to-date weighted average gain to 10.5% after fees.
Our positive performance in October was mainly attributable to stable performance from our fixed income investments, as well as strong performance by some tech stocks that we own in some of our more aggressive portfolios.
“What hindsight does is it blinds us to the uncertainty with which we live. That is, we always exaggerate how much certainty there is. Because after the fact, everything is explained. Everything is obvious. And the presence of hindsight in a way mitigates against the careful design of decision making under conditions of uncertainty.”
Having worked in capital markets for over 15 years, I am very much aware of false clarity of hindsight. When I worked as an institutional trader in Canada, we used to joke that the best portfolio was the “could have, would have, should have” fund, meaning the investments that we would, could or should have made had we had the ability to look into the future. For instance, I remember discussing Apple with a portfolio manager back in 2004. Had we had true conviction, we should have theoretically taken all the money we had, quit our jobs and gone 100% or even 500% into Apple (using leverage would have magnified the genius of the trade…). But we didn’t, because uncertainty is the one true constant in investing.
Emerging market currencies, bonds, and stocks have sold off since the US elections as protectionist banter and hyperbole involving the implementation of trade tariffs has seen money flock to US assets and strengthened the US dollar. However, when the dollar is strong, foreign assets become cheaper, and shrewd investors will be wise to look at oversold EM assets in the next couple of months.
Here is a five year comparison of the S&P 500 Index -vs- the MSCI Emerging Market Index:
As you can see, Emerging Market stocks have massively under performed the S&P 500 Index and have actually lost money for investors whereas the S&P 500 has almost doubled over the same period of time.
Yields are rising in the US in anticipation of higher rates and increased government spending on infrastructure. This means that bond prices are falling and will most likely continue to fall. Given the amount of money that has flowed into bond funds, a systematic reversal of this trend could be brutal for those holding longer bonds. ‘Everyone’ knew that rates were too low, but money kept on flowing into bond funds. Bonds even started being issued at negative yields. This was crazy, but it soon seemed completely normal because everyone was doing it. Institutional investors ‘had no choice’. Wrong. You always have a choice. I still can’t believe that there investors that bought 5 year German Bunds with a zero coupon above par…
Stocks are hot, bonds are not. This is a dynamic that investors should be getting used to. We will soon start to see record outflows from bond funds. How much of that money flows to equities remains to be seen, but it should be enough to sustain this rally over the near term.
Trump’s victory seems to have ignited ‘animal spirits’ in capital markets…
If you have been following our blog, then you will have no doubt noticed that we have not been big fans of investing in gold and gold related securities.
On August 31st, we issued our first warning salvo:
We followed up our initial commentary a couple of months later:
Our thesis remains in tact.
Here is a chart of the price of gold. Gold if off over 10% from its highs, and from a technical perspective it stands on a precipice. The 50-day moving average is about to cross the 200-day moving average. This is a damning, bearish event for something that trades purely on sentiment:
On August 12th, we decided it was time to buy Japanese stocks. Here is a chart of how our chosen approach to invest in Japanese stocks (long stocks, with a Yen currency hedge) has traded since:
WisdomTree Japan Hedged Equity Fund (DXJ US):
So far we’re up just over 12%. Look for this under invested, yet huge market to make more and more headlines.
The stock market continues to climb its wall of worry:
Here’s a link to another great article by Scott Grannis that discusses some of the movements in the markets recently:
I am back in the office this week after spending the better part of last week at the Citywire Berlin 2016 conference.
At the conference I met with 15 fund companies and listened to presentations from a number of interesting speakers whose topics spanned the current political climate in the US and Europe, to Google’s curation of the internet, to the control centers of the human brain.
All of this on the back of a sleepless Tuesday night spent watching the election results come in (I really had planned to sleep…). I saw US market futures plunge as Trump’s victory became inevitable, I saw the fierce rally in the trading session that followed.